Introduction
The Cash Ratio is the strictest measure of liquidity. It only considers cash and equivalents vs current liabilities, ignoring accounts receivable and inventory.
Explanation
Unlike Current Ratio (includes everything) or Quick Ratio (excludes inventory), Cash Ratio only looks at actual cash. It's the test of "if everything goes wrong tomorrow, can you pay your immediate debts?"
Formula
Cash Ratio = (Cash + Equivalents) / Current Liabilities
Example
Apple vs Retail: - Apple: Cash $50B, Current Liabilities $100B → Cash Ratio = 0.5 - Retail: Cash $2B, Current Liabilities $20B → Cash Ratio = 0.1 Apple can pay 50% of immediate debts with cash alone.
How to read it
Cash Ratio > 0.5 = excellent liquidity. 0.2-0.5 = acceptable. < 0.2 = worrying. Most companies have low Cash Ratio because they maintain minimal cash (it is not efficient to have a lot of idle cash). Tech companies (Apple, Google) have high Cash Ratios. Retail and manufacturing typically < 0.2. Red flag: Cash Ratio declining rapidly = cash problems.
Key takeaways
- Cash Ratio = more conservative measure of liquidity
- Cash Ratio = Cash / Current Liabilities
- Only look at actual cash, not receivables or inventory
- Cash Ratio > 0.5 = excellent
- Tech usually has > 0.5, Retail < 0.2
- Declining rapidly = red flag